Eliminating Individual Income Tax Possible?

Lieutenant Governor Tim Griffin (R) has proposed phasing out Arkansas’ individual income tax.[i] Griffin’s plan to chip away at the tax over several years reminds us of the strategy successfully used by former Governor Mike Beebe (D) in eliminating the state’s  portion of the sales tax on groceries imposed by state statute.

While eliminating the individual income tax would be wonderful for Arkansas taxpayers, don’t start counting on keeping your money just yet.  First, Griffin cannot file legislation, but he hopes to lead Arkansas tax policy if successful as a candidate for Governor in 2022.  Second, the individual income tax plays a huge part in the current Arkansas budget, having been reported as being $3.38 BILLION. The state’s heavy dependence on the tax makes it a difficult target and that is why a long-range plan to chip away at it would be necessary.

ARKANSAS’ INCOME TAX PROBLEM

Arkansas’ income tax (both individual and corporate tax) is a big stumbling block to Arkansas competing with other states. Looking at the individual income tax side:

  • First, Arkansas’ individual income tax is high, ranking as one of the worst in the nation number 41.[ii]
  • Second, two adjoining states do not tax wages and salaries. Texas does not have an individual income tax and Tennessee does not tax wages and salaries but taxes interest and dividends. Griffin says some of the other states surrounding Arkansas are also studying the possibility of eliminating their individual income taxes.

Arkansas’ individual income tax has long been a problem. Texarkana, Arkansas was the “canary in the mineshaft” warning us the income tax is a problem. Texarkana, Arkansas is right across the street from Texarkana,Texas where there is no income tax. In 1977, Texarkana, Arkansas faced a bleak future because residents could move a few blocks west to Texas, work at jobs just across the line, and keep a lot more of their money than if they stayed in Arkansas. The situation was so bad, in 1977 the Arkansas legislature passed a law exempting residents of Texarkana, Arkansas from the income tax and also exempting Texarkana, Texas residents who worked in Texarkana, Arkansas. To receive the huge exemption, the city had to pass a one percent (1%) sales tax to compensate Arkansas for some of the tax loss.

The 1977 law helped Texarkana, Arkansas residents but residents just out of town and residents in other parts of the state got no relief.

GOVERNOR ASA HUTCHINSON’S EFFORTS FALL FAR SHORT

Governor Asa Hutchinson (R) came into office in 2015 and since then has passed several measures to give income tax relief. Even with those cuts Arkansas has not kept up with changes in other states and has fallen farther behind other states during his term of office.

At the beginning of 2015 Arkansas was ranked as the 31st worst state for individual income tax. As we enter 2021 Arkansas has plummeted to the 41st worst.[iii]

Also bad news for Arkansans is that much of the income tax relief passed since 2015 has been offset by Arkansas increasing other taxes or passing new taxes, such as the gasoline and diesel fuel tax, the so-called Internet Sales Tax, which you pay on your purchases from out-of-state businesses, and taxing more items under the sales tax or taxing them at a higher rate.

GOVERNOR BEEBE AS A MODEL

Griffin says under his plan it would take several years to phase-out the individual income tax. While such a delay may sound disappointing because taxpayers would love to have it gone immediately, we don’t think it is realistic to eliminate the tax in one fell swoop. A tax phase-out is a model that has been successful, though on a smaller scale.

Former Governor Mike Beebe serves as a model for eliminating a tax through a phase-out. Governor Beebe made eliminating the state sales tax on groceries his priority.  He saw previous efforts fall short because they either tried to eliminate it all at once or also tried to eliminate local taxes on groceries as well. His plan to phase out the state grocery tax year by year made the change much more palatable to bureaucrats and politicians and made the plan possible. There would be no sudden drop off on tax.

Beebe came into office in 2007 and immediately went to work reducing the tax on groceries. He reduced the rate in 2007, 2009, and 2011. Due to a recession and other needs Governor Beebe had to delay his goal of eliminating the tax, but he would be would not be eligible to run for Governor again. So, in 2013, Governor Beebe came up with a plan to set up a trigger that would reduce the statutory rate to zero percent (0%) once state fund balances reached a certain amount. After he left office the trigger was reached and the tax was automatically eliminated.

The only state levy on groceries that remains is due to a one eighth percent sales tax in the Arkansas Constitution that goes primarily to Game and Fish Commission and the Department of Heritage.  That small amount of grocery tax can only be eliminated by the legislature proposing an Amendment to the Arkansas Constitution to exempt groceries from the tax.  The legislature can propose three amendments every two years.

A WORSENING PROBLEM

Clearly what Arkansas is doing is not working.  Since 2015 Arkansas has fallen ten places from 31st to the 41st worst state for individual income tax. If Arkansas does not do something different, we may run out of states who are worse than us.

The bad news does not stop with the individual income tax. The overall ranking of Arkansas in the Tax Foundation’s State Business Tax Climate Index puts Arkansas near the bottom at 45th which is a drop from 41st in 2015.

Arkansas’s high tax burden is the albatross around Arkansas’ neck hindering efforts to grow the Arkansas economy. For years Arkansas’ answer to economic development has been to keep taxes high and try to lure corporations to come to Arkansas by using Arkansas tax money to give them incentives and grants. The Arkansas Center for Research in Economics (ACRE) questions whether any of these giveaways have been a deciding factor in any corporation locating in Arkansas.[iv]

Now Governor Asa Hutchinson is proposing to use a similar model to reduce the income tax rate for five years on certain people coming to Arkansas to work. (See: Cut taxes for New Residents? Wonder Why?)

THE NEXT GOVERNOR?

There are two years left on Governor Hutchinson’s term but in his previous six years he has not been able to reverse Arkansas’s downward slide toward being the worst of the worst. So we look to the future to announced and potential candidates for Governor in 2022.

Lieutenant Governor Tim Griffin (R) is out early with his plan to emphasize elimination of the individual income tax over time. Griffin is not the only announced candidate for Governor in 2022, but he is the only announced candidate to have opposed tax increases for highways, preferring to cut government waste first. It will be interesting to see if other plans are proposed by other candidates.

Sarah Sanders (R) is a possible contender for the 2022 race for Governor.  Sanders, the daughter of former Governor Mike Huckabee, is very popular in Arkansas, but it is unknown whether she will enter the race or if she does what her tax plan would be.

Attorney General Leslie Rutledge (R) announced she will be a candidate for Governor in 2022. Rutledge included tax reform as one of her many priorities. We do not know if she has developed a tax plan.

Senator Jim Hendren (R), nephew of Governor Asa Hutchinson, has also indicated he will run for Governor.  Hendren recently introduced a bill to make some income tax changes. Like many plans in recent years, his bill does not decrease the tax burden. Instead it shifts the tax burden to another tax. His plan redistributing tax money to those who may not even owe tax would be funded by increasing taxes on tobacco products. (See: Fraud Plagued System To Redistribute AR Wealth – SB2)

It is still early for the 2022 campaign season so there could be other candidates to get into the race.

We did not mention any potential Democrat candidates because they are not likely to win and are even less likely to do anything to reduce the tax burden.

What is clear is Arkansas tax “reform” has not kept up with other states. What is unclear is how to reverse our path which is leading us toward becoming the worst tax state in the nation.


[i] https://www.arkansasonline.com/news/2020/nov/24/griffin-calls-for-phasing-out-state-individual/?news

[ii] https://taxfoundation.org/2021-state-business-tax-climate-index/#Individual

[iii]  https://taxfoundation.org/2021-state-business-tax-climate-index/#Individual

[iv] https://uca.edu/acre/2020/05/14/do-economic-development-incentives-work/

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